Community Voices: Use tax time as financial check-up opportunity

Friday

Apr 11, 2014 at 3:00 PM

With only a few days left of tax season, many of us are thinking about the financial decisions we've made over the past year and hoping some of them will get us one step closer to a better tax return. But what if instead of looking back, you thought about how to improve your financial future?

Kathie RhodesBayCoast Bank

With only a few days left of tax season, many of us are thinking about the financial decisions we’ve made over the past year and hoping some of them will get us one step closer to a better tax return. But what if instead of looking back, you thought about how to improve your financial future?

Whether you’re still pulling together the last final documents or submitted everything months ago, now is the perfect time to evaluate your current financial situation and make plans for the next tax year and beyond. It’s never too early to start planning for the future, especially when some of the decisions you make now could lead to significant tax breaks later down the road.

Regular contributions to an IRA, for example, can play an important role in helping you reach your retirement goals. Individuals under 50 may contribute up to a total of $5,500 annually to an Individual Retirement Account, otherwise known as an IRA, while anyone over 50 can contribute up to a total of $6,500. And a traditional IRA is only one of the many tools available to help you ensure a secure and comfortable retirement.

There’s especially good news for taxpayers interested in converting their traditional IRAs to Roth IRAs since income limits that previously disallowed higher-income taxpayers from converting to a Roth IRA have now been removed.

Before we take a closer look at this unprecedented conversion opportunity, a few words should be said about a traditional versus a Roth IRA. While both traditional and Roth IRAs are essentially savings accounts with tax breaks, the main difference lies in when income taxes are paid on contributed funds. With a traditional IRA taxes are payable upon withdrawal for retirement; in contrast taxes are paid up front when establishing a Roth IRA and qualified withdrawals are not taxed. Another salient difference lies in the terms of withdrawal. Those with traditional IRAs must start withdrawing by the age of 70½, while money can be left in a Roth IRA account as long as desired, allowing it to grow tax free.

While taxpayers have been able to convert their traditional IRAs ever since Roth IRAs were created in 1998, income and other restrictions kept many from taking the opportunity. Previously, a gross income of less than $100,000 was required to convert. That limitation has been lifted in filing year 2010, allowing anyone, regardless of income, to take advantage of conversion benefits.

Tax bracket factors into the amount of taxes paid on a Roth IRA conversion – the higher the bracket the higher the tax. That said, if taxes are expected to increase over the long term, conversion now makes sense to avoid paying a higher tax rate in retirement.

There are numerous factors to consider and eligibility requirements to be met when choosing between a traditional and Roth IRA or if converting from the former to the latter. A consultation with a financial adviser or retirement professional may provide the necessary information to make those decisions. With a variety of options available, selecting the path that fits your plans could be essential to a happy and assured retirement.

Kathie Rhodes is vice president of retirement services for BayCoast Bank, based in Fall River.